Short Notes — Ch 2 Basic Accounting Terms
⚡ Ch 2 — Basic Accounting Terms
PYQ: 6 questions — 2022·Q85, Q87, Q88, Q90, Q102 (5 in one paper!) + 2024·Q38. MCQ bank: 28 questions (Q17–27 · Q363–379). ⭐ The single highest-scoring chapter in the 2022 paper. Definitions only — learn them cold.
1️⃣ Quick Revision Table — the terms
| Term | Meaning | Exam hook |
|---|---|---|
| Entity | the business being accounted for | separate from the owner |
| Transaction | event of value between two parties | cash or credit |
| Assets | things owned (furniture, stock, building) | current vs non-current |
| Liabilities | money owed (loan, creditors) | creditors' claim on assets |
| Capital | amount invested by the owner | a liability of the business to the owner |
| Drawings | cash/goods taken by owner for personal use | ⭐ reduces Capital |
| Sales | revenue from goods/services sold | cash or credit |
| Revenue | Sales + other income (interest, profit on sale of asset) | |
| Expenses | cost incurred to earn revenue | rent, wages, salaries |
| Income | Revenue − Expenses | |
| Profit | excess of revenue over expenses | increases owner's capital |
| Gain | profit from an incidental event (sale of fixed asset, court case) | not from main business |
| Loss | excess of expenses over revenue | |
| Voucher | documentary evidence of a transaction | cash memo, invoice, receipt |
| Goods | items the business deals in | ⭐ depends on the business! |
| Purchases | goods procured (cash + credit) | |
| Debtors | owe us money (we sold on credit) | asset |
| Creditors | we owe them money (bought on credit) | liability |
Goods = whatever that particular business trades in.
- Furniture dealer buys chairs → Goods (Purchases)
- Anyone else buys chairs → Furniture (Asset)
- Stationery merchant buys stationery → Goods (Purchases A/c) ← MCQ Q410
- Book-seller buying a computer/fan → NOT goods ← MCQ Q25
2️⃣ Capital vs Revenue Expenditure ⭐⭐
| Capital Expenditure | Revenue Expenditure | |
|---|---|---|
| Benefit lasts | more than a year | within a year |
| Treated as | Asset (Balance Sheet) | Expense (P&L) |
| Examples | machinery, furniture, installation wages, increasing earning capacity | rent, salaries, repairs |
Rule: any cost that brings the asset to its usable condition is capitalised — purchase price + carriage + installation + trial run.
3️⃣ Two Discounts
| Trade Discount | Cash Discount |
|---|---|
| Given at the time of sale | Given at the time of payment |
| % off the list price | Incentive for prompt payment |
| Manufacturer → wholesaler → retailer | Seller → debtor |
| Not recorded in books | Recorded in books |
4️⃣ Current vs Non-current
Current = within 12 months / part of the operating cycle / held for trading / cash or cash-equivalent.
- Current assets: stock, debtors, bills receivable, prepaid expenses, cash
- Non-current assets: land, building, machinery, furniture, goodwill
- Current liabilities: creditors · Non-current: debentures, long-term loans
- Tangible = has physical form · Intangible = goodwill, patents, franchise rights (land is tangible!)
5️⃣ 🎯 PYQs from this chapter
2022 · Q87 — Drawings must be deducted from
a) Liability b) Gross Profit c) Capital d) Net Profit → Ans: C
2022 · Q102 — Income tax paid on business income by a sole proprietor is
a) debited to Trading b) debited to P&L c) deducted from capital account in the balance sheet d) added to capital → Ans: C A proprietor's tax is a personal expense → treated exactly like Drawings. Never a business expense.
2022 · Q88 — Wages paid for installation of a new machinery should be
a) credited to Machinery b) debited to the Machinery Account c) credited to Wages d) debited to Wages → Ans: B Capital expenditure — capitalised into the asset's cost.
2022 · Q85 — Depreciation is a
a) Cash operating exp b) Non-cash operating expenditure c) Cash non-operating d) Non-cash non-operating → Ans: B Operating expense, but no cash leaves the business.
2022 · Q90 — Receipt Voucher is
a) purchase of raw material b) purchase of stationery c) sale of machinery d) record of receipt of cash and bank → Ans: D
2024 · Q38 — Which document is proof of payment?
a) Receipt b) Invoice c) Debit note d) None → Ans: A Receipt = money actually moved. Invoice only demands payment.
6️⃣ Depreciation mini-block (MCQ Q363–370 — likely to appear)
| Point | Answer |
|---|---|
| Depreciation is provided on | Fixed assets |
| Caused by | Lapse of time + Usage + Obsolescence (all three) |
| Depreciation is the process of | Allocation of cost over useful life (not valuation) |
| Depletion method is used for | Mines and quarries |
| Charged from the date | the asset is put to use |
| Residual value = amount fetched at the | End of useful life |
| If repairs rise as the asset ages, use | Reducing balance method |
"Obsolescence is due to ___" — the book's key says D (None of the above), but obsolescence is caused by technological changes = option C. Go with C.
7️⃣ High-frequency MCQ traps
| MCQ | Point |
|---|---|
| Q18 | Furniture is NOT a current asset |
| Q19 | Goodwill is NOT tangible |
| Q20 / Q21 / Q26 | Trade discount = at sale; Cash discount = at payment |
| Q371 | Increasing seating capacity of a cinema hall = Capital expenditure |
| Q372 | Trial-run expenditure on new machinery = capitalised |
| Q373 | Interest on bank deposits = Revenue receipt |
| Q375 | Closing stock = current asset |
| Q378 | Carriage inwards → Trading Account |
| Q379 | Bank overdraft → liabilities side |
| Q409 | Goods withdrawn by proprietor → credit Purchases A/c |
8️⃣ If you remember nothing else
Drawings & proprietor's income tax → reduce CAPITAL · Installation wages → capitalise into the asset · Depreciation = non-cash operating expense · Goods = what the business trades in · Trade discount at sale, cash discount at payment · Receipt = proof of payment
🔗 Related
- Full notes: L-2-Basic Accounting Terms · MCQs Q17–27, Q363–379 in MCQs
- Prev: SN-1-Introduction-to-Accounting · Next: SN-3-Basic-Accounting-Concepts
